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tv   Options Action  CNBC  June 20, 2014 5:30pm-6:01pm EDT

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this is "options action." tonight -- ♪ summer loving had me a blast >> well, maybe not this summer because gas prices are on the rise. plus, not sure if you should buy stocks? one big indicator says the market is going higher. we'll tell you what it is and how you can top it. and this stock is trading at 52-week highs and one trader is betting $4 million it will go even higher. >> feeling lucky today. >> the action starts now. >> live from the nasdaq market site, i'm melissa lee. these are the traders here in
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times square. one vital part of the economy just can't catch a break. that would be housing. which is actually down on the year and trailing the utilities sector by almost 20%. so if this vital group is lagging, what does that say about the market as a whole? let's finds out. dan, this is a big part of the u.s. economy. >> yeah, investors don't seem that concerned about it until last week. we highlighted it last week. there was a huge buyer of december puts in the xhb. a lot of suppliers and retailers in that. so it's not just home builders. something about 150,000 in the december 26 puts when the etf was at 32. i don't think it gets that drastic here. so you're talking about the underperformance, one of the worst performing sectors down on the year. what does it mean? to me, investors don't know what to do with housing or home builder stocks in an environment that's this uncertain. >> one thing we have to remember is xhb was one of the best performing sectors coming out of late 2011. in fact, it's up about twice as
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much as the s&p is over that same period of time. the thing you should probably be concerned about, if anything, is that a lot of these home building stocks are trading at valuations that they basically had reached back in 2007. now, i'll admit a lot of them are more profitable than they were. but we're talking about lower revenues actually than they had at the same time. enterprise values are the same or even higher. that combined with the facts that things like the mattress makers, trying to get above market multiples. as you pointed out, some of the retailers, those aren't cheap either. >> look at the suppliers. trading at six-month lows. whirlpool another one. also rolled over recently. to me, there's a lot of things in there. i would just say this. we had two data points this week. we had the fed meeting where i think, you know, ever so slightly the fed chairwoman tried to talk up rates a little bit. they ticked up a little since then. we also had housing starts, which were disappointing. i don't know if investors are looking at home builders and saying, okay, if rates go up
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because the fed is right, does that kind of put a top on housing? >> or does it provoke people to get into the housing market? more because people are afraid that finally rates are going higher. >> we saw that spike from 1.6 on the ten-year yield last spring to about 3% just at the start of this year. and you know what's happened? housing, you know, stuff has plateaued. it didn't take the tour people thought it would. >> it's going to affect asset prices. if i'm going to go out and buy a house for a half a million dollars knowing the value will be hit by higher rates, i don't think the monthly payment is what's going to fuel my decision to purchase at that point. certainly not if i'm upgrading. i would actually think that concerns about rising rates, we saw it once t helped out a little, but i don't think it's going to this time. >> so you have a trade on xhb. >> if you're of the view the fed is wrong and thing the economy isn't as proving -- listen, they don't think it's going gangbusters, but i want to make a bearish bet. the underperformance is noteworthy. over the course of the summer,
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if we get increasingly bad data, i think xhb probably goes a bit lower. we're in an amazing low vol environment. i'm not in the camp you just want to own premium in the summer because you'll find it rot. the trade i did today in the xhb, when it was 32, i actually bought a put calendar. i bought the july, september 31 put calendar. i paid 70 cents for that. that's my maximum risk. what i'm trying to do here is set up to own longer-dated puts in september for cheaper. i'm selling that july put for 30 cents. i bought the september 31 put for a dollar. that -- hopefully that july is going to help finance my purchase of the longer dated put and let my thesis play out over a couple months. why did i choose july? we're going into -- listen, things are not moving at all. then we have the july 4th holiday. those puts, if the thing just moves slightly lower over that time period, it should help keep me in the game with that trade. >> we talk all the time about the fact that options are cheap. it would seem so if you're looking at the last couple years.
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if you look at 2005, 2006, and 2007, volatility can remain depressed for periods of time. september is actually the most volatile market period. so i wouldn't want to be short september. i think that's a nice one to buy. i might push it out a little further and look for an opportunity to roll into a short august if we stay basically where we are. >> by the way, for the people who like to play along at home, this is the jeff gunlock trade. he wanted to short xhb for housing. this is the exact directional trade. in terms of the charts, carter, what do you see? >> it's not a very good setup. it's the discussion of wall street versus main street. we know the markets have been at all-time highs, but housing has not recovered a the all. there's a well-documented phenomenon. this is the s&p home building index itself of which the xhb tries to track. you'll see quite clearly the boom, the peak in '05, the bust,
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and then the echo. what's important about the echo is it retraced exactly 50% of the preceding decline. here's the real problem. if you are to look at the performance in '06, '07, '08, '09, '10, '11, '12, '13, home builders have underperformed every single year. again this year they're underperforming. something is not right here at all. we do not like it. >> all right. directionally carter agrees. i'm just curious because there's debate about itb versus xhb. xhb has more of the retailers. the other names. itb is a play on home builders. >> yeah, i like the diversified play here. we've also seen this in other retailers. we've seen it in consumer discretionary. there is weakness, this underlying weakness. i think this is exhibit a. i want to make a broader bet than just specifically on the home builder. >> some of those other names you're referring to specifically trading above market multiples
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right now. >> all right. let's move on to the pain at the pump. the conflict in iraq sending oil and gasoline prices higher. so what does that mean for the consumer? mohr gang brennan is at cnbc headquarters. >> hi, melissa. as the conflict in iraq has sparked crude oil, gasoline has risen alongside it. the impact can already be felt at the pump. this week, gas prices rose to $3.68. that's a national average. according to aaa, it's the highest level for this time of year since 2008. now, what makes this even more disappointing for consumers is that in recent years, prices have tended to drop by almost a quarter per gallon during june. so what does it all mean for the economy? well, americans consume about 370 million gallons of gas a day. if consumption stays the same, a rise of just 10 cents takes $37 million out of people's wallets. if prices stay 10 cents higher over the course of a month, that's a hit of over $1 billion. so where will that money come
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out of? people don't cut back on driving but other purchases. back to you. >> morgan, thank you for that. well, to help us answer the very question morgan posed, let's jump back in with the chart master. carter? >> sure, a trade here on panera. we do not like it. sell it short and get out of it if you're long. let's look at a few of the things that give us a setup. this is a one-year chart of unleaded gasoline. we know there's seasonality. but the important thing is we're back to the june highs of exactly year ago. you could say, okay, big deal. but here's a longer term picture. despite the collapse associatesed with the bear market and the financial crisis, we've been persistently high here, staying at or near all-time highs. ultimately, we think this has the possibility of breaking out and exceeding the peak from the prior cycle high. not good as a setup for consumer, restaurant, and other things. take a look at a few other things relevant to this. this is the crb food stuff index. it's got lard, hogs, cattle,
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wheat, soybean oil. this is up substantially over the last six to eight months. you're talking about a 40% increase. take a look at a couple other things. here's chicken prices. you're talking about from the '07 low unabated. and people say there's no inflation. just not true. take a look at cattle prices from the '07 low. basically unabated. there is inflation. let's look at panera. we know the stock market is gangbusters. this is not a gangbusters chart. in fact, it's a two-year chart. the real risk here is that this stock is toying ominously with the prospects of breaking well defined lows and coming out through the bottom. to put this current setup in perspective, take a look at this long-term chart. we know it's been on trend. we know it's been a great winner. and look at what has just happened. we've officially broken trend. not good. panera can be drawn this way, if you'd like. a huge rounding top.
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here is the break point. any way you cut this thing, or you could just draw the trend line and leave it in there. this is not a good setup. if you're long panera, you should be concerned. if you're looking for a short, this is a good one. >> all right, carter. thanks. >> it's interesting because it seems like there is some feel on the street that people want to be short this. you would expect with this stock coming in that maybe some of the short interest, which is relatively high at over 9% right now, you would start to see people coffering that. it actually ticked up most recently. so it seems like there's some constitutional interest on the short side. valuationwise, this stock trading at about 20 times earnings looks reasonable. then with had darden's earnings today. those were miserable. they have a couple problems, to be sure. one of the other issues with panera is foot traffic. they have a low transaction -- about $9 every time somebody goes into this place. the rise in commodity prices, that can hurt what are otherwise fairly narrow margins. they did in one of their own investor presentations indicate
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they've having a bit of an issue where the number of transactions on a per-store basis. that suggests foot traffic is softening. >> walk us through your bears trade. >> i'm looking at buying the january 145 puts, paying 9 1/4 for that. out to january, those options are not decaying rapidly. because there is a short interest, this is one of the reasons you would not want to short the stock yourself. short interest sets up for short squeeze. i'm not saying that's what's going to happen here, but if those people decide to start covering, that's a risk if you short yourself. i think this is a good way to make a play. you could always look for opportunities to spread. >> what do you think, dan? >> i think the thesis makes sense. mike is 100% correct about pressing a stock that's down 20% like this that has that short interest. you want to do it with defined risks. i would take it a step further. i know it's a january option. it's not going to decay a heck of a lot. it will decay if it just sits here at these levels. i think this is a great candidate to possibly do a put calendar to sell something to help finance it over a period of
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time. find a catalyst you think is going to make it drop that 10%, 20%. >> i do agree with you. i think this is a great setup in general right now for calendars. the only thing i think that made me step away from that was what happened with darden today. we could see them move sharply. that's the reason. >> all right. got your own trade idea? send us a tweet @cnbcoptions. here's what's coming up next. what indicator is saying stocks are going higher? >> if i told you that, i'm afraid i'd have to kill you. >> but we'll tell you, and we won't have to kill you. plus, it was the one name on everyone's lips. >> the name on everybody's lips is going to be, roxy. >> it wasn't that, but we'll tell you what it is and why so many are betting so heavily on it when "options action" returns. ♪
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[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade.
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became big business overnight? ♪ like, really big... then expanded? ♪ or their new product tanked?
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♪ or not? what if they embrace new technology instead? ♪ imagine a company's future with the future of trading. company profile. a research tool on thinkorswim. from td ameritrade. mystery, drama, intrigue. these are the words people everywhere associate with mike koh. how does such a man trade the transports? you have to watch this to find out. ♪ >> it all started with a hot tip. >> we would go short the iyt.
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>> damn, i thought, he might jut be on to something. but i'd been burned one too many times for that. but i had to act. so i bought a put. it was december, the 140 strike, and i paid $6. now to make money, i needed eiyt to fall harder than dames do for kerry grant, or just below the strike of the put i bought for more than the cost of the trade. in this case, below 134 by december expiration. but $6. maybe it was the booze talking. maybe i had lost my way. but that was too much money. i searched for answers. mindlessly walking the halls of cnbc. then it hit me. i'm going to sell the july 140 strike puts against it. >> so to reduce my cost, i sold the july 140 strike put for $2 and created my put calendar.
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so what's the angle, kid? i spent $6, collected $2, cutting my cost to $4. and now instead of needing the iyt to fall below 134, i can put dough in my pocket if it falls by more than the $4 i spent. so where did it all leave me? well, since the time of the trade, the iyt is up slightly, leaving this one an open case. just another night in the case of risks less and making more. >> it's not the end yet. before we answer the question, carter brought us the hot tip. so carter, would you press this short? >> so far i'm not sure if it's much of a hot tip. we're unchanged. we know that transports are very steep, uncorrected. they're being driven by a few big names. in fact, the top big names are 40% of the weight.
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fedex is gapped up this week, but we think this is end-stage kind of behavior for the index. we would stay short. >> this is a situation i think it's really great we're taking a look at this trade. dan was talking about doing a put calendar himself. and this is one of those situations where we see how these kinds of trades can pay off. so we had a bearish bet that near-dated option is essentially worthless. we can buy that back right now and we're basically flat, and we could roll that into another calendar. as far as i'm concerned, this is one of those situations where doing these calendars allows us to put the short bet on and it's not costing us anything to do it. >> what would you do, dan? >> when they put the trade on, i agree with the thesis, but i hate the idea of trying to pick a top. i tried doing that in iyt a month earlier and got my face ripped off. look at it here. it worked out initially. the etf only sold off $5. now it's at those highs. this is probably a better shot where it has a shot of being rejected at the prior high. all right. coming up, it's today's $4 million bet that this hot name will keep flying. so what's the stock, and how can
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all on thinkorswim, from td ameritrade. welcome back. well, gas and oil heating up this week, it's been a great week for energy stocks. and the enthusiasm carried into the options pits today as traders furiously traded energy names like chesapeake energy and tesoro. all those names seeing unusually high volume. dan, what did you see? >> a very bullish roll in calls. you know, when the stock was 60.83 today, a trader rolled out of some november 57 1/2 calls very much in the money, selling 13,000 to close at $6.30. that's about $8 million in premium. took about half that premium and bought 19,000 of august 62 1/2 calls for 227. that breaks even on august
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expiration, up about 8%. if you look at the chart over here, it's a beautiful breakout right here. look at this green line. this is the level that trade breaks even at. what really struck me was that they took a trade that was in the money, and it was longer dated and rolled it closer and rolled it up. one of the things -- i'm just going to go to this implied voltyty chart. this is the price of options. those in the money calls they closed today were not nearly as sensitive on price movements in options. but you know what is are those out of the money calls shorter date the that are also going to catch their q-2 earnings report. when you look at this chart, this is a three-year of implied volatility. look at this thing here. what the trader is thinking is if i get any chatter of takeover or restructuring or anything and possibly any good news, if i get the direction right, the option prices are so cheap that i'm going to make money here. >> what do you think of this and the notion that it is chatter over takeover rumors that's driving it? we also have concurrently a
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widening in the spread between benton wti, helping the refiner trade. >> well, it's helping the refiner trade. we talked about the trade we saw in newfield explorations earlier this week, which would be propelled by hopes you're going to start seeing gas prices finally bump up when we start seeing that first lng terminal built in texas. so i think what we're seeing here is just basically a 45-degree angle and a lot of the energy space. we've seen it in the integrated names as well. i'm sure carter is going to touch on that 37 we have. we have a long-dated call on exxon. i would be inclined to do the same thing this trader did. you want to take some of those profits and roll out. angle these things are moving right now seems too fast and furious for me. >> which subsector in energy looks the best on a technical basis, carter? >> the big, heavy -- not so much by sectors, but things like conoco and chevron are surging. we have a circumstance here, i think, really people just
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looking for laggards in the group. people who like the group but think some are stretched double back and find a laggard like this to play it. we think it's a catch-up trade. >> dan, where do you find the value in the energy sector? >> we've been talking about it for a few weeks. throughout the last month, we have seen tons of upside call buying in names like kinder morgan. it's really hard to pinpoint it. it seems like, you know, it's attached to exxon rumors. you look at the xle. it's gone to the moon here. the price action in the options market seems very, very speculative to me. i have to assume that at some point we're going to get some sort of announcement in one of these names that could cause another move up. but i don't like it here. when you see this sort of frenzy, i think you want to fade it. >> all right. coming up next, the final call from the options pits. ♪
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then expanded? ♪ or their new product tanked? ♪ or not? what if they embrace new technology instead? ♪ imagine a company's future with the future of trading. company profile. a research tool on thinkorswim. from td ameritrade. time for the final call. the last word from the options pits. carter? >> panera, not a great stock. we would sell. >> dan? >> xhb. if you agree with the thesis, buy puts. finance a put calendar. >> mike? >> one of the things we've taken a look at is despite the fact options prices are low and even if you're a market skeptic, you don't have to short the market. look at put call daendars as a to finance. >> looks like our time has
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expired. i'm melissa lee. for more options actions, check out optionsaction.cnbc.com. meantime, "mad money" with jim cramer starts at the top of the hour. my mission is simple -- to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make you money. call me or tweet me
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